Applying Game Theory to understand M&A negotiations better

M&A negotiations

M&A negotiations are very tricky.Remember the old Wall street adage “Greed is Good”.
In the olden days, all negotiations were characterized on zero-sum game. This means that for a negotiation to be a success, one party must win and other must lose.
When we extrapolate this theory to M&A negotiations, a seller is concerned only about maximizing his price where as a buyer is concerned with minimizing his price. If the buyer and seller were not seen to be doing so, then they will be termed as poor negotiators.

Nash Equilibrium in Game Theory

  • Let us try to infer approach of negotiations through concept of Nash Equilibrium in Game theory.
  • The Nash Equilibrium describes that when there are more than one player involved in a game, then each player opts for a strategy which would be optimal considering the decision of the other players.In other words, every player in the game is happy and considers himself as a winner because everyone gets the outcome they desire.
  • To test the Nash Equilibrium, when no player changes their strategy after knowing the strategy of the other players, then Nash Equilibrium is achieved.Many concepts within Game theory like Prisoner’s Dilemma that demonstrate this concept.

Applying Nash Equilibrium in M&A Negotiations

  • Let us try to extend Nash Equilibrium to M&A negotiations and understand how it can help.
  • For a better understanding, let us have buyer and seller as two seperate groups. Each groups are given a specific criteria like Price, Employee retention, Non-compete etc and rank them by importance.
  • The intention is to arrive at a deal where both the parties are happy and satisfied.The catch here is that the buyer and seller are not allowed to share their priority list with other.
  • When a buyer or seller is looking to replicate the concept of zero sum game where they wants to win on all points, then they would lose the game.This is because one party would leave the negotiation because of the lack of intent to compromise from other party.

The following are the ways in which buyers and sellers can engage in successful negotiations.

M&A Negotiations step 1 – Build Trust

  • Establish trust with other party by sharing your issues and goals.This approach will have two mutually exclusive consequences.1)The counter party appreciates the frankness and hence also becomes transparent. 2)The counterparty can terminate and withdraw from the transaction.
  • A party should not worry even if it faces option 2 because the discussion is closed at a very early stage and hence saved costs, time and efforts.

M&A negotiations step 2 – Do your research but at the same time be ready to be the dumbest person

  • Great negotiators do their research and use that as a game plan to succeed during the negotiations. They also are self deprecating and do not hesitate to ask relevant follow up questions.
  • The background research and the follow up questions should culminate toward open discussions where there is an open exchange of information between the two parties.

M&A negotiations step 3 – Don’t use the phrase ‘Deal Breaker’

  • Many transactions reach a deadlock, some of these can be resolved while others may not.
  • In such a tough and high pressure situation, it is better to keep one’s ego in check and not use words like deal breaker which would only exacerbate the situation.
  • The better way to approach this situation is to discuss each other concern and ways to address them.There is a better chance to reach a successful solution through this approach.

Sample Case Study of M&A negotiations

  • Let us take the case of a privately owned company which is led by its two founders.The two founders own an equal share in the company.
  • The founders engage a banker to find a suitable buyer for its company.The marketing process is completed and prior to the execution of letter of intent, one of the founders claims for a higher share of proceeds.His argument is that since he had put more efforts and had a greater role in growing the business, he deserves a higher share of proceeds.The other founder refuses to accede to this and sticks to the earlier agreement.
  • An additional information emerged during this negotiations, that the founders owned a real estate together.One founder has lost interest in the real estate.Hence a Nash Equilibrium can be arrived by swapping the real estate share of one founder with an additional stake in the sale proceeds.


  • M&A negotiations based on the premise of zero-sum game will no longer succeed.Both buyer and seller should strive to focus on a result where both parties are happy and satisfied.
  • In order to strive towards this optimal result, both parties should establish a trust towards each other so that an open dialogue can be established.

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